Why shouldn’t You ask Banks for Investment Advice?

The banks in India mis-sell financial products.

Intentionally or unintentionally, they do it. And there is no other (softer) way to say it. Even the regulator RBI now accepts it.

And if you want to experience mis-selling by Indian banks first-hand, it is very easy.

Just walk into your bank’s branch and tell them that you have ‘more’ money and want to open a fixed deposit. They will surround you like vultures and try to push some product or the other, irrespective of whether you need it or not.

I don’t want to sound rude to our bankers but this is what really happens. That’s how most Indian banks are structuring their businesses – to maximize their incomes from non-banking activities even if it leads to mis-selling of financial products.

What exactly is Mis-Selling of Financial products?

Mis-selling means any sale of financial products by any person (directly or indirectly) by:

• Making a misleading or false statement, or/and
• Not taking reasonable care to ensure the suitability of the product to the buyer, or/and
• Concealing or omitting material facts about the product, or/and
• Concealing the associated risk factors of the product

Now mis-selling can be deliberate or unknowingly. But the end result is that the mis-sold products are either unsuitable for customers’ needs, misrepresented or are too complex to be understood by the customer.

The problem of misselling is systematic and unfortunately, deeply embedded in the Indian banking system. And everyone is involved – from top to bottom level employees of the branches.

Banks already have a huge readymade database of their client’s personal details and financial situations. This data is used by branches to systematically mis-sell life insurance products and to unnecessarily churn mutual fund portfolios. Most importantly, this is done without truly recognizing the customer’s need or risk profile.

And frankly, this kind of misselling is hard to catch because products are sold through verbal sales pitches. Customers, trusting banks as the protector-of-their-interests buy into the sales pitch and then, you already know what happens – customers end up with a lot of unnecessary and unprofitable financial products in their personal portfolios which doesn’t help clients achieve their real financial goals.

Just a couple of days back, I read about how a well-known private bank’s relationship manager duped senior citizens for lacs of rupees.

My blood boiled after reading about it. Senior Citizens are very easy targets for mis-selling. And that is just one example of mis-selling. Just try searching for mis-selling of insurance policies in India and mis-selling by banks in India and you will find out other horror stories.

What do Indian Banks Mis-Sell?

There has to be a good reason for banks to do this. Isn’t it?

1. Cross-selling products like insurances, ULIPs and mutual funds to existing bank customers helps banks earn commission income. And banks want to maximize this commission income. So they just sell anything and everything as if there is no tomorrow.
2. Bank employees are put under a lot of pressure due to the steep sales and incentive-linked targets for selling such third-party products. And they have to secure their jobs and hence, try to push these products down everyone’s throat.
3. For all practical reasons, banks are unaccountable for doing this. There are RBI-issued checks and controls. But we all know how much such checks & controls matter to the employees on the ground (who have sales targets to meet or else they will lose their jobs)
4. Lack of adequate training and expertise of bank staff is often quoted as one of the major reasons. And this is true to an extent. Most relationship managers know s*** about what they are selling. But I don’t think that just giving proper training will help curb mis-selling. They will still do it if the sales targets are steep and incentivize them to do so.

It is common sense that investment advice should be based on your financial goals. That’s goal-based financial advisory. But when banks are selling you something, it’s their own goals (commission maximization, sales target achievement, etc.) that they are trying to meet, not yours. 🙂

Data on How Banks mis-sell Mutual Funds

Mis-selling of financial products by banks in India is very common. Till very recently, RBI was in denial mode due to a lack of proof. But things are changing and so is the regulator RBI’s stance on the misselling of financial products in India.

Banks have been selling insurance policies for years by acting as the Bancassurance channel for Insurance companies. Since bank’s reach is huge, this has no doubt increased the penetration of insurance in India.

In recent times, banks are doing the same with mutual funds. They are actively selling mutual funds to their existing customers. And you all know that MutualFundSahiHai 🙂 Here is a success story of mutual fund SIP.

Since I talk a lot about mutual funds and mutual fund SIPs, I thought I will share some data that will prove how taking mutual fund advice from your banks is wrong.

Many mutual funds come from the same business house as the bank. There are several. And most of these bank-sponsored mutual funds are dependent on their sponsor for sales of their schemes.

Have a look at the below table which I have taken from Outlook Asia’s Manoj Nagpal’s tweet. It shows which AMC pays the largest share of commissions to each of the large MF distributors (in this case, banks):

It is very clear that most banks, try and sell the schemes of their own fund houses.

Or let’s put it this way – for each bank, the best mutual fund schemes to invest in for their customers are none other than the schemes belonging to their own group! 🙂

That’s laughable!!

And there is a clear conflict of interest here!

Customers of the bank, unfortunately, don’t know this and tend to trust their bankers blindly.

The above table is based on data up to March 2017. Another detailed analysis (though of earlier years) can be found here and here. But the story remains the same.

Note – Please don’t think that here, I am trying to say that bank-backed AMCs are not good fund houses. I am not saying that.

But you really need to think about this – when you buy mutual funds through your bank, is the bank really advising you on what is right for you OR just acting as a seller who wants to get the maximum commission from whatever they can sell to you?

I think by now, you should know the answer.

What are the best mutual funds to invest in?

There are several ways to find this out. But one of the worst ways is to ask your bank or bank’s relationship manager. 🙂

And add the fact that banks only sell you the regular plans of mutual fund schemes and not the direct plans, it is quite evident that investing in mutual funds through banks is a bad choice.

Tip – If your bank tells you that you are their ‘preferred customer’ or ‘inner circle customer’ or gives you some similar classification, just run away! 🙂 A cross-selling bullet has your name written on it and will hit you soon. 😉

What should You do?

There is one thing that I should not miss saying here…

To be fair, it is not just about mis-selling of financial products by the Indian banks. It is also about mis-buying from the customers. It is their hard-earned money and hence it’s their responsibility to find out what is right for them and what isn’t.

I agree that a subset of bank customers will still be unable to decipher what is good for their personal finances. But others need to wake up and acknowledge that the financial world is based on the selfish interests of everyone. You need to look out for your own self.

As for the banks, they are still doing a fine job of providing ever-so-necessary banking services. But as of now, they are not suited for the sale of other financial products. Due to their structure, they are geared to maximize sales and their commission income from financial products – and this leads to hard cross-selling of products which results in lots of mis-selling. Mis-selling by banks is very difficult to prevent unless radical structural changes are made.

So you should be wary of the advice you receive from your bank.

And banks may seem like doling out free advice in good faith. But free financial advice is very dangerous. And technically, it’s not even free. There is a commission hidden somewhere where you can’t see it.

For most people, banks are just good to do banking and nothing else. For real financial advice, you must understand that if it is good, then it won’t be free (just like legal and medical advice).

Before deciding the financial products you want to purchase, spend some time and find out your financial goals (download this free financial goal planning excel sheet), assess how much risk you can really take and then pick the correct financial products.

If you can’t do this on your own or need a second opinion, do not hesitate in seeking out investment advisors. Those advisors who are compensated only by you sit on the same side of the table as you and can work in line with your interests and help you make a solid financial plan.

Mis selling by banks in India is a reality. So now you know why you shouldn’t ask your Bank for Investment Advice or financial advice?